At the general meeting of participants it was decided to direct all undistributed profits gained over the past year to increase the authorized capital. What are the tax consequences of this transaction if the participants (founders) of the enterprise are two legal entities – a resident (payer of income tax and value added tax; hereinafter – VAT) and a non-resident? Is it mandatory to make an advanced payment?
Dividends reinvestment
A business transaction that involves an increase in the authorized capital at the expense of the profit received from the investment transactions, which should have been distributed among the owners of corporate rights, is a reinvestment of dividends.
Advance payment
The procedure for advance payment of income tax (hereinafter – advance payment) for dividends payment is determined by item 57.11 of the Tax Code of Ukraine (hereinafter – the Tax Code). Given its norms, we distinguish the following basic limitations:
- the advance payment is paid by the issuer of corporate rights, on which dividends are accrued, who is the payer of income tax;
- the advanced payment is paid only if a dividends payment decision is made;
- the advanced payment is not paid when dividends are paid to individuals, as well as to the benefit of the owners of the corporate rights of the parent company (under certain conditions).
In the case under consideration, these restrictions do not apply. First, the issuer is a payer of income tax. Secondly, the dividends payment decision was made (dividend reinvestment is a consequence of making this decision). Third, the dividends belong to legal entities.
Given the abovementioned, in the case of dividend reinvestment through their introduction into the authorized capital, the income tax payer is obliged to accrue the advance payment of 18% for the amount of dividends belonging to legal entities (both resident and non-resident) and to pay it to budget.
In addition, the income of a non-resident legal entity with its source of origin in Ukraine in the form of dividends shall be taxable in accordance with the provisions of item 141.4 of Art. 141 of the Tax Code. And regardless of the method of using such income as reinvestment (SFS Individual tax consultation No. 1053/6/99-99-15-02-02-15/ІПК of March 15, 2019, No. 3368/6/99-99-15-02-01-15/ІПК of August 2, 2018). The function of the tax agent is assigned to the resident, which is why he deducts the 15% repatriation tax from the amount accrued in favor of the non-resident dividend and transfers it to the budget. Of course, unless otherwise provided by the international agreement of Ukraine with the country of residence of the person in whose favor the payments are made. That is, only an international treaty can save a non-resident from repatriation tax, unless it establishes other rules and the non-resident confirms its status with the appropriate certificate (Art. 103 of the Tax Code).
About VAT
And finally, VAT. Dividend reinvestment transactions are not subject to VAT (subitem 196.1.1 of the Tax Code).
